Investor Letter - April 2021 Long/Short Equity ETF (CBLS) Sustainable Equity ETF (CBSE) - www.changebridgefunds.com
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www.changebridgefunds.com Investor Letter – April 2021 Long/Short Equity ETF (CBLS) Sustainable Equity ETF (CBSE)
Performance Table: April 30, 2021
Total Return %
Fund Name
Symbol 1 Month 3 Month Year-to-Date Since Inception
Changebridge Capital Sustainable Equity ETF (NAV) 4.08% 20.75% 25.31% 49.25%
Changebridge Capital Sustainable Equity ETF (MKT) CBSE 3.84% 20.32% 25.20% 49.25%
S&P 500 Index SPX 5.34% 12.98% 11.83% 19.01%
Changebridge Capital Long/Short Equity ETF (NAV) 2.71% 17.62% 17.11% 36.20%
Changebridge Capital Long/Short Equity ETF (MKT) CBLS 2.68% 17.76% 17.42% 36.70%
Wilshire Liquid Alternative Equity Hedge Index WLIQAEH 2.69% 8.48% 8.03% 9.92%
Performance data shown above represents past performance and is no guarantee of and not indicative of future results. Total return and
value will vary, and you may have a gain or loss when shares are sold. Current performance may be lower or higher than quoted. Returns
include changes in share price and reinvestment of dividends and capital gains, if any. Please go to https://changebridgefunds.com for full
month-end and quarter-end performance. The inception date of each fund is 11/13/2020. Market Returns are based upon the midpoint of
the bid/ask spread at 4:00 p.m. Eastern Time, when the NAV is normally calculated for ETFs. Your return may differ if you trade shares at
other times. After-tax returns are calculated based on NAV using the highest individual federal income tax rate and does not reflect the
impact of state and local taxes. Actual after-tax returns will depend on an investor's tax situation and may be different from those shown.
After-tax would not be relevant to shares owned through a tax-deferred account such as an IRA or 401(k) plan. The return After Taxes on
Distributions and Sales of Fund Shares may exceed the Return Before Taxes due to an assumed tax benefit from the pass-through of foreign
tax credits and/or from losses on a sale of Fund shares at the end of the measurement period. Changebridge Long/Short Equity ETF Expense
Ratio: 1.70% Changebridge Sustainable Equity ETF Expense Ratio: .85%
Monthly Performance & Market Review:
In April of 2021, the Changebridge Capital Long/Short Equity ETF (CBLS) returned 2.71%, outperforming its
benchmark Wilshire Liquid Alternative Equity Hedge Index by 0.02%. For the year-to-date, CBLS was up 17.11%,
outperforming it’s benchmark by 9.08%.
The Changebridge Capital Sustainable Equity ETF (CBSE) returned 4.08% during the month, underperforming its
benchmark S&P 500 Index by 1.26%. For the year-to-date, CBSE was up 25.31%, outperforming it’s benchmark
by 13.48%.
In April, US markets continued to show their resiliency, with the S&P 500 Index rising 5.34% over the month. With
the onset of earnings season, investors were reminded of the adage “buy the rumor, sell the news.” Markets
generally anticipated favorable earnings, particularly when measured against the pandemic-impacted comparable
period from one year ago. Even in consideration of the favorable set-up, actual results tended to overshoot
expectations. Alphabet (parent company of Google) reported an impressive earnings beat, yet the stock sold off
on the news on the heels of having rallied 81% in the 12 months before reporting earnings. Similarly, Apple blew
away sell-side estimates, but the stock’s reaction the company’s earnings release was muted – having rallied 93%
over the prior 12 months. Amazon had rallied 46% over the 12 months prior to its impressive earnings and revenue
beat, also raising guidance for the year - yet the stock also sold off on the news. The list goes on… with the vast
majority of S&P 500 companies having reported Q1 numbers, the actual earnings growth rate of ~50% is more
than double the estimated earnings growth rate of ~24% at the end of the first quarter (March 31).
When Covid first hit US shores, nearly every public company stopped providing guidance. As they eventually
reinstated forecasts, they incorporated noticeably lower target earnings levels for 2020. With so many extraneous
considerations, management teams lowered the bar meaningfully. As visibility began to resurface, many
companies not only outperformed reduced expectations, but they also continued to issue conservative guidance,
enabling the “beat-and-raise” cycle to persist.
For nearly a year, conservative posturing was justifiable, and it generally worked. Estimates were shattered and
stocks tended to rally on the sequence of beat-and-raise quarterly announcements. That trend came to ascreeching halt in April. After lapping the initial brunt of Covid-19, the lyrics of Styx’s “Renegade” seem to be ringing true “the jig is up, the news is out...” Valuation multiples had become elevated, shareholder expectations had risen – the market had once again become a discounting mechanism. If the expectation was that the market would reward “strong” earnings results with higher stock prices, then simply beating consensus estimates was no longer sufficient. Fundamentals and valuations are becoming more relevant, as we navigate beyond the haze of a global pandemic, as we usher in a new political regime in the United States, and as the capital markets contemplate the next steps in terms of both monetary and fiscal policy. We expect these to be persistent themes looking forward. At Changebridge, we look for opportunities to find value in changing market backdrops. We believe market transitions create compelling opportunities for active managers, and we would be hard-pressed to recall a specific period where more transitions were afoot. Contributors & Detractors: As we do each month, we would like to highlight securities that meaningfully impacted performance in each of the two strategies. We believe investors deserve transparency into performance drivers as well as changes in our investment thesis. With a heightened preference for portfolio transparency, we also provide a comprehensive portfolio attribution by security for the month of April in the appendix. Top long contributors (CBSE and CBLS) Sharps Compliance (SMED) is a provider of responsible medical waste management services. Their medical waste disposal services encompass route-based pickup, mail-back, and a kiosk-based infrastructure for safe and convenient disposal and recycling of medical waste and unused medication. Covid-19 and the ensuing vaccination efforts are underway, and the US is focused on quickly and safely disseminating vaccines to its population. One of the lesser discussed ramifications of this effort is the safe disposal of used vaccination needles. SMED is the number 2 provider of responsible medical waste removal and is the leader in the retail pharmacy channel. The current vaccination efforts are likely to produce a surge in demand for SMED’s unique services, one that we believe will persist for years. Prior to Covid-19, SMED was growing revenue at over 10% annually for the prior 4 years, with expanding operating margins as the business scaled. While the stock has appreciated, we believe consensus estimates for revenue and operating income are still too conservative, leaving meaningful upside potential. Scientific Games (SGMS) is a manufacturer and software provider for the gaming industry. Their segments include digital gaming operations software, an app-based gaming platform, operational services for state-run lotteries, and parimutuel machine production. Their legacy machine business was clearly impacted – cut nearly in half – by covid- induced lockdowns as traffic to casinos largely halted beginning in March of 2020. The state-run lottery business, despite requiring in-person interactions, showed impressive resilience, posting revenue growth of 1% in ’20. Their 82% equity stake in Sciplay (SCPL) appreciated meaningfully as Americans have largely identified new forms of entertainment and social engagement. SGMS’ digital segment is worthy of closer inspection. This segment powers much of the back-office for digital gaming platforms, such as Fan duel, Flutter, Wynn, Fox, Golden Nugget, and more. By our estimation, the company powers approximately half of all digital gaming interactions in the US. Their relationship with customers is quite strong, and the business has a meaningful barrier to entry given that they are an integral part of customer interactions on these platforms. Given that the US digital gaming market is in the early innings of what appears to be an improving regulatory landscape, we believe the business has strong tailwinds. With New York approaching legalization of gaming and the NFL making strides towards endorsing responsible gaming, SGMS stock appreciated meaningfully in the month of April. Progyny Inc (PGNY) is a fertility benefits management company, providing employers with the option to give their employees a suite of fertility management solutions. Their outcomes for IVF patients are meaningfully better than the national average, which creates better outcomes for both employees and employers. Fertility management can be a highly stressful experience and providing a qualified network to help employees navigate the journey is a unique value proposition. Despite industry-wide declines in medical procedures in 2020, PGNY grew revenues in their most recent quarter by 54% on an annual basis. With an estimated 1 out of 8 couples experiencing fertility- related issues, the addressable market for PGNY is large and growing. As empirical evidence suggests that sperm
counts are in decline globally, while the average age for women to give birth slowly rises, we believe the market for responsible, value-add fertility management solutions will continue to grow. While recent birthrate data indicate overall declines, the concurrent trends of delaying pregnancy and the impending reopening bode well for PGNY’s solutions. We believe there are long-term needs to address what has become a global health concern, and PGNY offers best-in-class solutions. Top long detractors (CBSE and CBLS) Transmedics Group (TMDX) is a medical device company that is attempting to revolutionize the way organ transplants are stored and transported. Their proprietary Organ Care System (OCS) replicates the physiological conditions within a human body - in a portable box. The three initial target organs are lung, liver, and heart. Lung is currently FDA approved and heart will face an FDA panel in the future. Recent data out of the liver trial has been promising, leading to improving investor sentiment and eager anticipation of an upcoming heart review. The market for organ transplantation is unique from many other medical device markets because it is highly concentrated among a few hospital systems. In the US, 55 centers have an estimated 70% market share, creating an opportunity for TMDX to grow rapidly if their devices are FDA approved. This company has a ~$500m market cap and had a significant move higher in the month, but with an ~$8b total addressable market, we think it has a long runway ahead. During April, the FDA panel concluded that TMDX’s Heart solution provided an asymmetric risk-reward opportunity and voted in favor of approval. However, the vote was contentious and may lead to an FDA approval with some usage-limiting labelling. As this news was absorbed, TMDX stock has sold off meaningfully. Solaris Oilfield Infrastructure (SOI) provides a suite of efficiency-improving tools for oilfield operators. Their sand storage silos reduce sand waste and pollution, improve safety for operators, and are run electrically. They also reduce the number of trucks needed to transport sand, and thus fuel required to operate. Financially, they generated free cash flow throughout the recent trough in commodity markets in 2020, and have shown sequential improvements in capacity utilization of their silos and silos deployed since Q2 ’20. In Q1 ‘21, system usage was up 15% sequentially, and commentary from management suggested continued improvements in deployments. On mid-cycle estimates, we believe free cash flow to be in excess of $70m, implying meaningful upside to even a 10% free cash flow yield. We are enthused by the opportunity to invest in a company that is improving safety, pollution, and efficiency within an industry that has room to improve its environmental footprint. Sterling Construction (STRL) is a heavy construction engineering firm. Their services include heavy construction and highway builds, construction on data centers, distribution centers, and warehouses, as well as a regional homebuilding business. Historically, a low margin highway construction business, STRL has made a number of strategic acquisitions to diversify into higher margin, faster growing end markets, such as the construction of data centers and distribution centers. These businesses have been growing organically for many years, and STRL management was able to opportunistically acquire into the space for less than 6x EBITDA. Backlog has been growing steadily despite the impacts of Covid-19, and margins continue to improve as the business mix shifts away from legacy highway construction. In the background (but not yet in estimates) is the potential for a meaningful infrastructure bill that rebuilds the nation’s roadways. With $80m in NOL’s (net operating loss carryforwards) STRL is well positioned to generate free cash flow and either pay down debt or to seek out compelling acquisition targets. We believe this to be an underfollowed and misunderstood security with secularly growing end markets. Top short contributors (CBLS only) Impinj Inc (PI) is a designer and distributor of RAIN-based RFID tracking sensors. They serve primarily retail-based customers responsible for moving large quantities of products around the globe. Their distribution strategy depends upon channel partners, which leaves PI in a somewhat clouded position in terms of revenue visibility. Historically, ASP’s (average selling prices) for their sensors have declined annually, while volumes improved, albeit in a somewhat inconsistent fashion. The end market is large, and the value proposition is reasonable, yet they have underperformed relative to peers such as Zebra (ZBRA). During the most recent quarter, the global semiconductor shortage began to impact PI’s ability to source inventory, resulting in a mixed forecast for the
remainder of the year. With meaningful recent stock price appreciation and optimistic projections heading into earnings season, there was not room for mixed results and the stock price declined. Demand appears strong and we believe the chip shortage eventually rationalizes, so we covered the short position soon after the company reported earnings, having realized gains on the position in the month. PVH Corp (PVH) designs, sources, manufactures, and markets apparel and footwear. The company’s two primary brands are Tommy Hilfiger and Calvin Klein. Their business is largely (2/3) international, with geographic growth driven primarily from Asia. As a result of stay-at-home mandates, sales have shifted from brick and mortar to e- commerce platforms, allowing PVH to transition in a difficult operating environment. They have faced headwinds from tight inventory and supply chain disruptions, but the company appears to be managing these headwinds reasonably well. A situation worthy of ongoing attention is the allegations of labor violations in the cotton producing region of Xinjiang, China which has important ramifications for PVH, and indeed the apparel industry. Dorman Products Inc (DORM) is a manufacturer of automotive products, largely focused on aftermarket sales. Although Dorman benefits from increased reliance on used vehicles (a category that has seen strength in recent years) organic revenue growth has been muted. Further, we estimate that nearly half of Dorman’s revenues are tied to combustion engines. Electric vehicles continuing to gain market share introduces a long-term headwind for the business. Interestingly, there is a lag effect which the market may be overlooking: replacement parts are often needed around three years after a new car is sold. Thus, while EV’s have only started gaining meaningful market share in the last 2-3 years, the emergence of EVs has not yet had an impact on Dorman’s business. As EV’s continue to gain share, the impact on Dorman’s revenues is likely to become more meaningful. While we acknowledge Dorman is a well-run business, the shift to EVs may become a material headwind. In the most recent quarter, Dorman reported mixed guidance and underwhelmed shareholders, who sold DORM after the earnings announcement. Despite the secular headwinds, we saw an opportunity to cover the position and realize gains, as we anticipate a ramp in vehicle miles driven in the coming months might be supportive of sentiment. Top short detractors (CBLS only) Dish Network Corp (DISH) provides a direct broadcast satellite subscription television and audio service throughout the United States. Their core business, satellite television subscriptions, has been in decline for years, and shows no signs of rebounding. They have undertaken new investments in an effort to diversify away from the legacy satellite television service, such as an ambitious nationwide 5G project, and the acquisition of Boost Mobile. While we cannot rule out the potential success of DISH’s new ventures, we believe they will require a tremendous buildout expense and may take years to reach fruition. AT&T recently agreed to sell its DirecTV business (a direct competitor to DISH) at an estimated enterprise value of $16.25b, far below the $67b that AT&T paid for the business in 2015, one proxy for the headwinds facing the category in recent years. In the last month, DISH announced a partnership with Amazon’s AWS to power its 5G efforts – a similar agreement to that of Verizon and AWS. Market participants viewed this as a validation of DISH’s 5G efforts and the stock rallied in the month. We remain skeptical of the initiative considering the required spend, which may hinder financial returns from this massive undertaking. Carter’s Inc (CRI) is a designer and marketer of baby and young children’s apparel, primarily in the US. They own a number of household brands, such as Carter’s and OshKosh. For years, there has been an expectation that Millennials would begin to enter their peak reproductive period, and birth rates would rise. This, in turn, would be a long-term tailwind for CRI, who largely serve newborn and young children. Instead, we have witnessed years of declining birth rates, culminating with a meaningful decline in late 2020. Some estimates suggest birth rates fell 7-9% in late 2020, and have likely only rebounded to negative low single digits in early 2021. Instead of creating the tailwind to CRI growth that has been expected for years, Covid-19 may have created an uphill demographic climb for CRI. The reopening represents a potential short-term catalyst, and the stock reacted favorably to near- term operating metrics, but with CRI trading close to pre-Covid-19 valuation levels in what appears to be a more difficult demographic backdrop, we remain short shares. DoorDash (DASH) provides a platform for restaurant food delivery. The company has developed a network that connects diners, restaurants, and delivery drivers in one automated system. Covid-19 and the resulting lockdowns
and social distancing efforts benefitted the business model, with revenue growing 226% in ’20. Despite this impressive sales growth, operating margins were largely unaffected as DASH continued to invest in its own systems and marketing to gain share. While this may be a sensible strategy, the setup in ’21 appears to be less supportive. With restaurants re-opening, DASH faces a stronger competitive threat from its primary customers: restaurants. Given expectations are for continued growth above the revenues presented in ’20, these targets strike us as potentially aggressive. In a shorter than standard lockup period following the company’s IPO, DASH shares held by insiders became eligible for sale before the usual 180-day period. Despite the tough comps and share overhang, as fears of higher interest rates abated, and hiccups appeared in the vaccine distribution channel, some investors viewed DASH as a potential beneficiary and shares rallied. We continue to believe there are valuation and competitive challenges for the business. New Positions: Positions established and held through the month of April include: New long positions (CBSE and CBLS) Magnite Inc (MGNI) provides a programmatic advertising model that thrives outside of the “walled gardens” of Google and Facebook. Their primary customers are publishers seeking to monetize their advertising inventory, optimized for digital distribution. There is a meaningful network effect, as more inventory begets more buyers, which begets more inventory. We are in the early innings of a transition to full OTT (Over-the-top) streaming, and it seems highly likely that advertising will play a meaningful role in this transition. At Disney’s recent investor day, they highlighted their programmatic advertising efforts at both Hulu and Disney’s core business. Magnite is the primary provider of programmatic advertising for Hulu and the market is recognizing that they are in an enviable position to expand their relationship with Disney. In April, MGNI also completed an agreement to acquire SpotX, a close competitor in the OTT space. We believe this further consolidates MGNI’s market share and lead in the nascent programmatic OTT advertising space. Further, we believe that Google’s recent removal of cookies and Apple’s recent policy change allowing users to opt out of tracking put the publishers in the driver’s seat. Historically, with user data widely available across the internet, ad buyers were in an enviable position. Today, that narrative has flipped, and sell-side platforms such as MGNI should be beneficiaries. Redfin (RDFN) provides a web-based real estate brokerage and database offering, a disruptive force in the real estate industry. Their model effectively cuts sales commissions in half by digitizing a large part of the real estate sales process. They also offer sellers an opportunity to avoid the traditional sale process altogether with a direct offer from Redfin, and recently began to provide Trust and Mortgage services under one roof. The most recent quarters have shown accelerating market share and impressive incremental operating margins in their core business. Redfin’s digital platform was showcased during the remote conditions brought on by Covid-19, and it did not disappoint. As RDFN capitalizes on their recent momentum, they have an opportunity to build brand loyalty in a business marked by meaningful scale advantages. With a large and fragmented market that is transforming to digital, Redfin appears to be in an ideal position to continue to gain share and cross sell its new services. Purple Innovation (PRPL) is a mattress, bedding, and cushioning company. Their innovative IP around mattress design coupled with their direct-to-consumer (DTC) approach have served as differentiating factors in their businessmodel. In the last year, PRPL has outgrown both the industry and their own internal expectations. Purple mattresses are consistently rated among the highest in their price points across third party reviews, and customerservice has been noted as a unique selling point. Clearly, having grown from 285m in revenue in 2018 to 648m in revenue in 2020, they are striking a chord with consumers. It appears likely that PRPL’s pre-covid push into wholesale distribution channels was resulting in market share gains relative to the larger bedding brands. While the national reopening process is still nascent, initial indications are that those trends remain largely intact. Given a small, but rising market share, improving incremental margins, and strengthening manufacturing capabilities, we believe there exists a reasonable path for PRPL to grow operating profits meaningfully. Solaris Oilfield Infrastructure (SOI) provides a suite of efficiency-improving tools for oilfield operators. Their sand storage silos reduce sand waste and pollution, improve safety for operators, and are run electrically. They also
reduce the number of trucks needed to transport sand, and thus fuel required to operate. Financially, they generated free cash flow throughout the recent trough in commodity markets in 2020, and have shown sequential improvements in capacity utilization of their silos and silos deployed since Q2 ’20. In Q1 ‘21, system usage was up 15% sequentially, and commentary from management suggested continued improvements in deployments. On mid-cycle estimates, we believe free cash flow to be in excess of $70m, implying meaningful upside to even a 10% free cash flow yield. We are enthused by the opportunity to invest in a company that is improving safety, pollution, and efficiency within an industry that has room to improve its environmental footprint. New short position (CBLS only) Kar Auction Services Inc (KAR) provides wholesale vehicle auction services. Their largest platform, ADESA, is a marketplace for used vehicle transactions. For years, they have ceded share to digital auction marketplaces such as ACV Auctions. In an effort to combat this trend, KAR has made a number of acquisitions into the digital auction marketplace at what appear to be full valuations. They recently acquired Backlot Cars at what appears to be over 7x trailing revenue. For reference, KAR currently trades at less than 2x revenue. They are also facing a difficult used car sourcing dynamic. As drivers largely stayed home in 2020, miles driven was down meaningfully and many people chose to purchase their car off-lease, rather than return it. At the same time, new car production is down meaningfully as auto manufacturers face a global semiconductor shortage. The confluence of this event has drastically reduced the available inventory of used cars that go to auction. Further, retail marketplaces such as Carvana and Carmax have been aggressively sourcing their own inventory directly from consumers, rather than through auctions. We believe many of these trends are likely to persist into the future. Please feel free to reach out to us via our website, www.changebridgefunds.com, follow us on LinkedIn (Changebridge Capital), and on Twitter (@changebridgecap). Thanks for your trust,
CHANGEBRIDGE CAPITAL, LLC Investors should consider the investment objectives, risks, charges, and
expenses of the funds carefully before investing. This and other information
180 Canal Street, Suite 600 are contained in the Fund’s prospectus, which may be obtained by visiting
www.changebridgefunds. com or by calling 617-717-2912. Please read the
Boston, MA 02114 prospectus carefully before you invest.
info@changebridgecapital.com Investing involves risk. Principal loss is possible. As an ETF, the funds may trade
www.changebridgefunds.com at a premium or discount to NAV. Shares of any ETF are bought and sold at
market price (not NAV) and are not individually redeemed from the Fund.
(617) 717-2910 Market Returns are based upon the midpoint of the bid/ask spread at 4:00
p.m. Eastern Time, when the NAV is normally calculated for ETFs. Your return
may differ if you trade shares at other times. The equity securities held in the
Funds’ portfolio may experience sudden, unpredictable drops in value or long
periods of decline in value. This may occur because of factors that affect
securities markets generally or factors affecting specific issuers, industries, or
sectors in which the Funds invest. The Funds are considered to be non-
diversified, which means that they may invest more of their assets in the
securities of a single issuer or a smaller number of issuers than if they were
diversified funds. As a result, the Funds may be more exposed to the risks
associated with and developments affecting an individual issuer or a smaller
number of issuers than funds that invest more widely. This may increase the
Funds’ volatility and cause the performance of a relatively smaller number of
issuers to have a greater impact on Fund performance.
Applying ESG criteria to the investment process may exclude securities of
certain issuers for non-investment reasons and therefore the Funds may forgo
some market opportunities available to funds that do not use ESG criteria.
Short selling is an investment strategy utilized in CBLS, which involves the sale
of securities borrowed from a third party. The short seller profits if the borrowed
security’s price declines. If a shorted security increases in value, a higher price
must be paid to buy the stock back to cover the short sale, resulting in a loss.
The Fund may incur expenses related to short selling, including compensation,
interest or dividends, and transaction costs payable to the security lender,
whether the price of the shorted security increases or decreases. The amount
the Fund could lose on a short sale is theoretically unlimited. Short selling also
involves counterparty risk – the risk associated with the third-party ceasing
operations or failing to sell the security back.
The Funds are new with a limited operating history.
The Changebridge ETFs are Distributed by Foreside Fund Services, LLC.You can also read
